Scepticism about the merits of minimum wages remains this newspaper's starting-point. But as income inequality widens and workers' share of national income shrinks, the case for action to help the low-paid grows. Addressing the problem through subsidies for the working poor is harder in an era of austerity, when there are many other pressing claims on national coffers. Other policy options, such as confiscatory taxes, are unattractive.

Nor is a moderate minimum wage as undesirable as neoclassical purists suggest. Unlike those in textbooks, real labour markets are not perfectly competitive. Since workers who want to change jobs face costs and risks, employers may be able to set pay below its market-clearing rate. A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs.

It's part of The Economist's attempt to make a case for raising the U.S. minimum wage.

Don Boudreaux has done a good job of pointing out some of the problems with The Economist's argument. I won't repeat Don's points here. Instead, I'll add a few more.

Here's the paragraph that precedes the quoted paragraphs above:

For free-market types, including The Economist, fiddling with wages by fiat sets off alarm bells. In a competitive market anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least skilled--the people intervention is supposed to help. That is why Milton Friedman called minimum wages a form of discrimination against the low-skilled; and it is why he saw topping up the incomes of the working poor with public subsidies as a far more sensible means of alleviating poverty.

Other than the confusion between "demand" and "quantity demanded," this is a very nice statement of the views of a large part of the economics profession. That's what makes the next two paragraphs so strange. They admit Friedman's point and then say, in effect, as in the BBC TV series, Yes, Prime Minister, "Something must be done; this is something; therefore it must be done."

It is true that they make a case that a skillfully set--read "low"-- minimum wage will not do much harm. I don't buy their case, but they make it. Here's what they say:

Nor is a moderate minimum wage as undesirable as neoclassical purists suggest. Unlike those in textbooks, real labour markets are not perfectly competitive. Since workers who want to change jobs face costs and risks, employers may be able to set pay below its market-clearing rate. A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs.

Note three things.

First, often, when someone accuses someone else of being a "purist" in anything, it's because he's about to advocate something that goes against his own principles or understanding. I think that's happening here.

Second, notice that they say employers may be able to set pay below its market-clearing rate. OK. Lots of things may happen. Do they happen? The Economist doesn't say. Oh, and by the way, if wages are below their market-clearing rate, shouldn't we see a shortage of labor, not what looks to most of us like somewhat of a surplus?

Third and finally, The Economist wins the "thumb on the obvious" award with the last statement above:

A minimum wage, providing [sic] it is not set too high, could thus boost pay with no ill effects on jobs.

Well, duh. But isn't that the issue? No one disagrees that if it's not too high, then there will be no bad effect. What we opponents are saying that it's already too high and that setting it higher, will make it even more "too high."

Finally, The Economist says that we can't be like those French people:

High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world's highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.

26% is a shockingly high unemployment rate for people in that age group who are trying to get on the first or second rung of the economic ladder. So are 20.8% and 35.8%. What are those? Those are the unemployment rates of 16 to 19 year olds and of 16 to 19 year old black people in America. But I guess The Economist is not shocked by that.

Comments and Sharing

I don't get it -- is this blog supposed to be about economics or demagoguery? Why is almost every post on it about criticizing someone for an economic position that doesn't fit neoliberalism? The Economists article is fine. Some may disagree with it, but it isn't economically illiterate. This post's attack just doesn't make sense.

@Curtis,I don't get it
True.Why is almost every post on it about criticizing someone for an economic position that doesn't fit neoliberalism?
Well, since you’re addressing this post, it’s about bad economic reasoning. I see that you didn’t notice.Be honest -- do the Koch brothers fund this blog?
Curtis, I see you have keen powers of observation. No, Liberty Fund funds this blog. I guess you didn’t notice.

I buy a lottery ticket, it could win, ergo, we should all buy lottery tickets; if I take meth, I might get inspired an write a hit song! Probabilities and their alternative states be damned. The fact that cost/benefit analysis is explicitly prohibited in some political contexts highlights that our current polity is in many ways, Rome postquam the Republic.

If markets were perfectly competitive, all supply and demand curves would be known, and so competition would be unnecessary, and the state would be needed to replace the markets. But if markets are not perfectly competitive, bad people exploit good, and the state should replace markets. By state I mean populus, embodied by some ubermensch who channels the perhaps unknown but still undeniable social will.

I'm disappointed in the Economist here. If the primary concern is inequality and low income workers not having enough money, a minimum wage is one of the most problematic and least effective ways to solve this. And they know it! For the US you don't even have to do a new or innovative program, if you're really concerned just advocate an expansion of the Earned Income Tax Credit. After all, the EITC has been one of the most effective government programs in actually reducing poverty. So why bother talking about a raised minimum wage?

Agree completely with your analysis. Also, as Boudreaux suggested in his letter, The Economist's reasoning is just strange:

Normally free-market advocates are against minimum wages, but in this case they should support them because workers are badly off and inequality is really high.

That suggests that the main reason to oppose minimum wage laws is that poor people don't really need or deserve the support that the minimum wage provides. But of course, the free-market advocate's whole point is that minimum wage doesn't actually help the people it is intended to help. That they need even more help than usual tends to prove exactly the opposite of what the article claims.

"Normally we do not advocate the use of blood-letting to cure disease, but this patient is very, very sick, so maybe it's time to reconsider."

First, often, when someone accuses someone else of being a "purist" in anything, it's because he's about to advocate something that goes against his own principles or understanding. I think that's happening here.

Great point, though of course it's not any sort of devastating argument against the Economist position (nor is it presented as such). Still, I wonder who would take this criticism in stride -- shrug it off -- rather than try to deny it.

To my mind, an inability to formulate principles and subsequently act in accordance with them is a fundamental flaw in human reasoning and behavior. That said, there is a "natural" tension between principled action and pragmatic action, though in my line of work, many pragmatic decisions turn out to be counterproductive.

I'm wondering what form the defense of unprincipled thought and action (call it pragmatism) takes. Note that I would predict principled action to be ultimately pragmatic, but I can hardly consider myself authoritative here.

I always see minimum wage (MW) discussions framed only in terms of potential benefit/detriment to MW workers - the obvious benefit being higher take-home pay for MW workers, and detriment being potentially fewer MW workers/jobs available at the new MW price.

What I've not seen is any discussion of the other real beneficiary of higher MW - the U.S. Treasury (Fed Gov tax receipts).

I've heard the MW target number being bandied about in Congress these days is $10.05 per hour. I did a quick static, simple comparison (using IRS Form 1040, Publication 15 Employers Tax Guide) of what US Treasury receipts are now for each MW worker at $7.25 per hour, and again with MW at $10.05 per hour.

The "benefits" are impressive. The MW worker take-home pay increases by nearly 35.2%. (Actually less, if one factors probable elevated state tax rates - not considered here.)

But the really interesting thing is that US Treasury receipts from that $10.05 per hour MW worker increase by an even more impressive 54.2%! And that doesn't include inherent reductions of US Treasury outlays for EITC, etc. with a higher wage rate. Given that, the US economy could dump more than a third of the current MW workforce due to resulting supply/demand/price interaction, and US Treasury would still be "bucks ahead" in terms of receipts and outlays over what it has now at $7.25 per hour MW.

It seems the unequivocal "winner" with increased Federal minimum wage is the US Government. Of course it could very well be that, given the recent CBO Report findings, the bottom two income quintiles actually want to become taxpayers again.

But who funds Liberty Fund? I know Koch Bros put a lot of money into GM. There are obvious links between GM and econlog. So I'm not necessarily a conspiracy theorist nutjob to wonder if the same neoliberal demagoguery is at work. BTW, Hayek is very much anti-neoliberal. Wish more neoclassical economists would realize that. Russ does.

If you think The Economist article is bad economics, then you've got a different ax to grind. And it's not about economics.

@Shayne Cook,
Your whole analysis assumes that the money for the minimum wage comes out of thin air. It doesn’t. It comes from someone.
Let’s get money out of it by looking just at output. With a higher minimum wage, there are fewer people employed. With fewer people employed, there is less real output. With less real output, there is less output to tax. With less output to tax, there are lower revenues.

@Curtis,
But who funds Liberty Fund?
Answer: Pierre Goodrich.BTW, Hayek is very much anti-neoliberal. Wish more neoclassical economists would realize that. Russ does.
I’m not sure what a neoliberal is. I’ve never called myself one. In fact, I can’t recall anyone referring to himself or herself as one. The only people I’ve seen use that term are people who use it to describe believers in the free market.
One interesting thing I’ve already noticed about you, Curtis, is that you tend to substitute name-calling for analysis. You say my post is not about economics, even though it is, and you say my criticism “doesn’t make sense,” but you haven’t even tried to say why.
Since you seem to trust Russ--I assume you mean Russ Roberts--and since this post is about The Economist’s reasoning on economics of the minimum wage, ask Russ what he thinks of The Economist article.

Nice post and nice point on the selectivity in the "shocking" reaction to unemployment rates at the end. I think that deserves a post of its own.

I wonder if they might say the age brackets are different (ages 15-19 in US vs. 15-24 in France).

Re this:

Since workers who want to change jobs face costs and risks, employers may be able to set pay below its market-clearing rate.

I guess I assumed such costs were factored into the market-clearing price. So, to say that these factors may allow employers to set pay below market clearing seems like circular reasoning. Is that wrong?

If not, then can't we also use this logic on the employer side? Employers face costs and risks of employee turnover (e.g. ads, interviewing, training, learning curves, uniforms, etc.), so they might have to set pay above the market-clearing rate to retain employees and avoid these costs?

I agree with your criticisms of the Economist article. But I have a couple of possible mechanisms in mind that might reduce or eliminate the disemployment effect of a high minimum wage in the U.S., and would like to hear comments from people who understand these things better than I do.

It seems to me that when most classical economists think about the supply side of the labor market, they imagine that the minimum wage is an artificial constraint imposed on an a priori free labor market.

But in reality, many or most unemployed workers are receiving government subsidies of some kind, the value of which can comparable to or larger than the income from a minimum-wage job. There's evidence that a lot of our high unemployment over the past 5 years is due to the increased generosity of those subsidies (and reduced barriers to getting them), rather than to a reduced availability of jobs.

So it occurs to me that from the point of a low-wage worker, an increase in the minimum wage might make work more attractive by making it pay better than his subsidies.

Second, because employers face a new, high fixed cost per worker in ObamaCare, the fractional increase in the total cost of employing a worker due to the minimum wage is less than it was before.

I'm not how all this works out. But it seems at least plausible that the disemployment effect of a minimum wage increase would be lower than a simple model would suggest.

Libertarians should not oppose minimum wage laws. We should encourage the left to set the wage much higher. The left is cowardly and stingy for suggesting a mere increase to $15. It proves their lack of interest in poor workers. If they really want to help, they should demand a minimum wage of at least $50/hr.

Instead, the left always opts for a minimum not much above the market wage. That allows them to appear to help the working poor without actually doing anything. We should quit letting them get away with that con.

I completely agree. Actually, the reason for my comment was to illustrate the possibility/probability of hypocrisy on the part of Federal representatives (and others) who strongly advocate a higher MW on the basis that "it benefits the poor". The "poor" are only minor beneficiaries, if at all.

Frankly, I've always considered having a Federal MW (nationwide) to be hopelessly foolish. The cost of living in the SF Bay Area (or Williston North Dakota, for that matter) differs greatly from the cost of living in Absorokee Montana, Cody Wyoming and any number of other places.

But if there is to be a Federal MW, it should probably be set high, and coupled with Federal legislation that grants any state or local government regulatory forbearance to set a lower local MW as its local economic/unemployment realities warrant.

Easy there, David, using "neoliberal" in a sentence does not equal name-calling. It's not a bad word. It's an adjective to describe one's econ/pol affiliations. And it's pretty common. Might want to Google it.

An interesting side note to the newest post about the Denver shooting. There's empirical data that contradicts a model. There's been a model that violent outbursts like the one yesterday were usually perpetrated by far-right people. Along comes a left-leaning HS kid (who complained about "neoliberals" mind you).

So instead of ignoring or manipulating this "data" (which is in fact a tragedy), shouldn't we revisit the model which assumes only far-right people are capable of violence? (I think that's the point of the post -- along with a critique of bad journalism). And from there, surely the analogy to MW/employment should be pretty clear.

A brief google search of the term "neoliberal" shows that it means whatever the writer at the moment needs it to mean. Like most terminology ruined by the left, its purpose is to make conversation impossible.

A few use "neoliberal" to refer to what libertarians call "classical liberalism." They apply it to the current US in order to advertise their complete ignorance. They think the removal of two or three regulations by Jimmy Carter unraveled the decades of socialism built up by Hoover, FDR and Johnson. They are ignorant of the 3 million plus new regulations added since 1970.

The current socialist government is failing spectacularly, but socialists cannot bear the shame, so they must convince people that the failing government is not socialist but "neoliberal."

The meaning of words like "neoliberal" (and all others) is determined by a bottom-up emergent process of individual choice. Language is entirely conventional. Word meanings are not legislated or determined by governments.

The notion of evaluating MW as a fraction of median income is useful. Are there any charts that show cross-sectional or time-series data for various countries?

If it is true that setting MW to 100% of the median would have negative effects on employment and (positing that) setting it somewhat less would have positive effects, then isn't there some point of crossover? Are liberals basing their case on that math? What does it say?

The only person not mentioned in any of these arguments is of course the most important person involved. That is the person receiving a value in wages that is very close to their marginal productivity. This person is HARMED by increasing the minimum wage regardless of what happens to others. The folks that are for increasing the Minimum Wage never address this issue. How callous can they be?

Much of the minimum wage discussion centers on whether or not a higher minimum wage hurts or helps the working poor, or the low skilled worker.
I suspect that a lot of people who support increasing the minimum wage expect the higher price for labor to come from a reduced return on capital. In other words, the employer can afford it. Since the employer is rich, this is just a way to make sure the rich guy shares more of his profits with his employees.
Does lowering the return on capital encourage more investment? Does it matter? Will small business investors reduce their expansion plans as their labor costs rise?

There are many worthwhile expenditure that are not being made because of "austerity." The solution is to replace "austerity" with cost benefit analysis of expenditures, not levy a quasi-tax on employers of low income workers in order to subsidize the wages of low income workers.

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